UK household debt has more than quadrupled since 1990, despite interest rates being at historic lows, a new report out today has showed.

The study came with a warning that the high levels of debt being serviced by Britons posed a ‘serious threat’ to the economic recovery, especially as rates are due to start rising next year.

In 1990, total household debt in the UK stood at £347billion, but it soared by 314 per cent to £1,437billion in 2013, with people in their thirties and forties carrying most of its weight, according to financial research firm Verum.

While in the past those aged 35 to 44 have been the main drivers of economic growth, they are now the age group with the highest level of debt, burdened by mortgages and struggling to pay them back amid low wage growth, Verum said.

Squeezed: People aged 35 to 44 are the age group with the highest level of debt, Verum said

The report said the principal cause of the rising level of debt was the increase in house prices, which has not been matched by wage growth, with mortgage debt now representing 89 per cent of total household debt, up from 85 per cent in 1990.

‘To maintain the recovery and keep a lid on inflation while taking account of the family debt time bomb is an incredibly tough balancing act,' said Verum’s director of research Robert Macnab.

And added: ‘Our research has shown that because outstanding debt levels are so high, particularly mortgage debt, even relatively small increases in interest rates will have a significant impact on household spending.’

More into debt: UK household debt has soared by 314 per cent to £1,437billion last year from £347billion in 1990

Verum estimates that every 0.5 per cent increase in interest rates would cut £4.8billion from household spending and said a 2.5 per cent rise could drag the UK back into recession.

The report analysed official data from the
Office for National Statistics and the Bank of England as well as data
on debt write-offs by UK banks and building societies, consumer
insolvencies and mortgage arrears and repossessions.

Robert Macnab, Verum’s director of research said: ‘If interest rates were to hit 3 per cent, historically an abnormally low level, it could trigger a prolonged and socially damaging recession with collapsing house prices, rising property repossessions and a further dramatic increase in insolvencies.’

Mortgage debt: The report said the principal cause of the rising level of debt was the increase in house prices

Professor James Fitchett, of Leicester University School of Management, also said the main problem facing the UK economy was concerning consumer spending and debt.

‘As these data show in considerable detail, the prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy,’ he said.

Verum said that currently 5.6 per cent of household disposable income was going towards debt interest payments. But it warned that if this reached 12 per cent the country could be at risk of falling back into recession.

‘The reaction of families when this threshold is reached is to cut back on credit-sensitive purchases such as vehicles, holidays, durable goods and furniture, which inevitably results in recession,’ Macnab said.

The report also found that last year there were three times as many consumer insolvencies as during the last interest-rate recession of 1990 – this despite low interest rate of 0.5 per cent since 2009, compared to 14.6 per cent in the early ‘90s.

Insolvencies: In 2013 there were three times as many consumer insolvencies as in 1990, Verum said

Official figures out this week have showed that the average weekly wages fell for the first time in five years in the second quarter, with the Bank of England signalling that it was placing increasing emphasis on weak pay data in deciding when to raise interest rates.

Speculation had been growing that the Bank would raise interest rates before the end of this year, but it now looks almost certain to hold off on a rise in interest rates until 2015 after slashing its forecast for wage growth in half when it released the quarterly Inflation Report yesterday.

The Bank said it expected earnings to grow by a below-inflation 1.25 per cent rather than 2.5 per cent this year.

Speaking on BBC Radio, he noted that the inflation rate was 1.9 per cent in June - slightly below the Bank's 2 per cent target.

'That's very good news because it means that we're not going to be pushed into raising interest sharply, because the inflation outlook remains pretty subdued,' said Miles, a policymaker on the Bank's rate setting committee.